The basic economic problem

Economics is made up of two main processes which can be called its foundations. These processes are production and exchange which are simply the processes of producing goods and then exchanging them for money which is the medium for the exchange of goods. These processes have increased our living standards and allowed specialization and higher rates of production. However to understand economics we must first understand the basic problem that reasoned its presence. This problem is known as the basic economic problem. However, to fully understand this issue we must identify its causes and in this situation we have two ; Firstly, the world is limited in its resources or as economists like to call it scarcity. Although many might see scarcity as a negative thing. Lack of supply of any goods is what gives the good its value assuming there is sufficient demand. As we know there is a limited amount of land, labour, capital and enterprise and these are the categories we categorise our resources in. These limitations decrease the world's capacity of production which has to satisfy the unlimited wants of human beings bringing us to our second reason. We humans have always wanted more and better things resulting that we have infinite wants. This results in scarce resources which are required to satisfy infinite want. Even though in the last decade production has taken large leaps in satisfying those unlimited wants by specializing in different jobs introducing mass production which really have extended the boundaries of the maximum rates of production that could be reached however, it is thought that we will never reach a time where infinite amounts of goods can be produced. So if people have many unsatisfied wants and the resources exist to satisfy only some of them, we have to make a choice and in my point of view I see economics as a tool to preform this practice. As we study economics we assume that everyone thinks and acts in a rational way which makes the study of this social science much less complicated and a little less complex for us to understand. Building on our assumption that we all act rationally we firstly choose our most satisfying wants and so on until we reach our least satisfying wants. However, choice only comes when you favor something over another because it gives you more utility so we have what is called an opportunity cost which is the choice that the person hasn't chosen. Opportunity cost in simpler words represents what was gone or lost from your choice. For example if a government chooses to build a school instead of a hospital. The cost of building the school is not only the financial cost but also the opportunity cost of not building the hospital. Sometimes people might be mislead into thinking that choosing is a simple process that can take place in a few seconds. This example shows how complex it sometimes could be. For example, imagine a thirsty man entering into a juice store he will buy the first drink and he will get a high satisfaction from drinking it compared to the satisfaction of not spending his money for the juice. However, on the second drink the satisfaction will decrease and the same for the third drink. The interesting thing is that this man will only stop drinking when the previous drink gave him the same satisfaction as the money he paid for the juice did. In this case the money was the man's more satisfying choice and the drink became the opportunity cost of that choice. In other words the man favored to keep the money because it gave him more utility than buying the drink. As we saw the example above choosing is not always a simple process and it doesn't always come down to choosing between one thing or another. Which is why economists have created production possibility curves for governments to clearly show the opportunity cost derived from governmental choices. When governments or any other decision making bodies are faced with choices they are
Hamad Al Noaimi 12PDO

usually broken down into three simpler questions.

What goods and services to produce: shall we build more schools or shall we increase the national savings? Shall we increase the production of the ipod nano or increase the production of the ipad? How best to produce goods and services:how can we best use oure scarce resources? Shall we produce internally or externally? Shall we use batch or flow production? Who is to receive goods and services: how can we distribute the wealth? How can we satisfy the most wants? Shall we increase pensions or pay to benefit education? Shall we pay our loans or save in the national reserves? Some examples of governments making choices are; before establishing Al Amal hospital in qatar people used to travel abroad for cancer medical treatment wich was very costly for the government to finance. So the government had to choice between financing patients to be treated abroad or to build a cancer treating hospital locally. So the government has chosen to establish al amal hospital and stopped financing abroad treatments for cancer patients. This reduced the long term costs and the abroad treatment became the opportunity cost. Another example would be saudi arabia in the petrol refining industry. When petrol was discovered in the middle east it was first discovered in bahrain however there were little amounts and the petrol eventually ran out in Bahrain. When saudi arabia was digging for water and they discovered the petrol. They had two choices. They could either refine the petrol internally or refine it in bahrain. To refine it internally meant that saudi arabia could be dependent on itself in exporting petrol and less money will have to be spent abroad. However the other choice meant that they will build better relations with a neighboring country which could provide political, economical or military support in the future. It also meant that saudi arabia would appear as a country helping its other fellow arab country which advantaged its reputation. It was chosen that saudi arabia will refine petrol in bahrain and the opportunity cost was the capability of refining all the petrol internally. In economics when there is a statement it is usually categorized into two categories. Its either a positive statement or a normative statement. A positive statement is when something happening is stated without judging it or putting any values or importance on it leaving the listener to make this choice. Sources of positive statement are usually newspapers and channels. An example would be (a water shortage problem is currently facing somalia today). On the other hand a normative statement does the oposite of a positive statement by judging and valuing the statement. This type of statements could usually come from politicians or philosophers or anyone who has a point of view on the subject. An example would be (the biggest economic problem faced by the world in the last decade is the 2008 world economic crisis).

Hamad Al Noaimi 12PDO